When I have free time, I like to join X (formerly Twitter) Spaces. Many of these spaces focus on Web3 communities, crypto investments, and the Metaverse. This past week, I joined an unnamed space where a young man was pitching a play-to-earn project. When he saw me among the 20-30 people in the room, he quickly invited me onto the stage, claiming that because I was there, the project was bound to get huge. I quickly corrected him, explaining that my presence was somewhat random, as there was no way for me to know what the space was about beforehand.
After a brief pause, he began telling me about his project. When he finished his sales pitch, I started asking him questions about the tokenomics of the crypto game. To my surprise, he didn’t seem to know much about it—even though it was his project. After admitting that he was paying the play-to-earn participants out of his own pocket, he returned to hyping up the project to the listeners.
Here’s the thing: If you're going to start a Web3/Crypto/NFT project, you should know basic tokenomics. What often happens with most projects is that as people buy into them, the value of the coin increases. However, unless there’s a way to grow the token's value outside of attracting more investors, those who got in early will exit, leaving later investors with the deficit. This is why many crypto projects are often labeled as Ponzi schemes.
This issue is especially problematic among play-to-earn projects, which typically lack the mechanics to pay earnings other than through the project's liquidity. As more players join, the value of the project itself often declines. For those new to these projects, here’s a quick glossary of terms and explanations to help you understand this ecosystem better.
Tokenomics: “Tokenomics” is a popular term that describes the math and incentives governing crypto assets. It’s essentially the study of how tokens are bought, sold, and traded. Similar to stock trading, if you know how to invest in solid projects or companies, your personal value will grow.
Blockchain: Blockchain is a shared, immutable ledger that records transactions and tracks assets in a network. In this context, it refers to decentralized finance projects or NFTs. Blockchain can be used to record any type of information, representing virtual or tangible objects that can be tracked or traded.
DeFi: DeFi stands for decentralized finance, an alternative to traditional, government-regulated currency.
Supply: Supply refers to the total fixed number of tokens released over time. There’s the available supply, meaning tokens that are readily accessible, and the overall supply, which is the maximum number of tokens that can be available over the lifetime of the project. Some projects release all their tokens at once, while others distribute them gradually.
Liquidity Pool: A liquidity pool is a collection of funds locked in a smart contract, used to facilitate trading on decentralized exchanges (DEXs). Liquidity pools are crucial for enabling trading of tokens without the need for a traditional order book system. Participants who provide liquidity to the pool often earn fees or rewards in return.
Smart Contract: A smart contract is a self-executing contract with the terms of the agreement directly written into code. It automatically enforces and executes the contract when predetermined conditions are met, eliminating the need for intermediaries. Smart contracts are essential for decentralized applications (dApps) and DeFi projects.
ROI (Return on Investment): The number one question developers should ask themselves is, "What does our project do, and what is the return on investment for our customers?" ROI isn’t always monetary in Web3. Some successful projects focus on community building, where being inside the “walled garden” grants access to those who can afford it. Other projects have great gameplay, making access to the game itself the return on investment. Many projects emphasize community and encourage their members to “ape in,” meaning to invest without considering the return.
Rug Pull: A “rug pull” is when a project is designed to take from the community without giving anything back. It’s like pulling the rug out from under investors. This term is often used to describe scenarios where developers take the money and run or use liquidity funds to prop up a failing project.
APY (Annual Percentage Yield): APY represents the annual return on an investment, factoring in compounding interest. In the context of crypto, it's often used to describe the potential yield or return on staking tokens or providing liquidity.
Staking: Staking involves locking up tokens in a blockchain network to support its operations, such as validating transactions. In return, participants earn rewards, usually in the form of additional tokens. Staking is a way to earn passive income in many crypto ecosystems.
DAO (Decentralized Autonomous Organization): A DAO is an organization represented by rules encoded as a computer program that is transparent, controlled by organization members, and not influenced by a central government. DAOs operate based on community governance, where token holders can vote on important decisions regarding the project's future.
Build a System That Works: Many crypto and NFT projects fail because they don’t build a system that allows them to offer a service that can sustain the project's liquidity. Over the years, I’ve seen countless projects collapse because they didn’t know how to create a system that could generate enough revenue to reinvest in the project. Think of people buying into a project as investors putting their money into a pool so you can build a business. You might take liquidity out to pay staff, artists, developers, and influencers to promote your project. By doing this, the project’s value will decrease until these people can produce a return on their investment. These profits should then be reinvested into the project, thus raising its value and essentially paying back your investors.
Token Distribution: Token distribution is important because it provides accountability. Where is the money going? How much is allocated to the team, the treasury, and player or investor rewards? Teams often produce a white paper—a business plan for their Web3 project—explaining how it works, its unique selling proposition, and what they hope to accomplish with their investors.
Burning: Burning is the process of removing tokens from circulation to create scarcity, thereby driving up the value of each remaining token. However, there must be demand for the token in the first place for burning to be effective. Otherwise, the project owners are just removing tokens without any impact.
Degen: “Degen” is slang for someone who buys into a project with little or no research, hoping it will grow in value.
Gas Fees: Gas fees are transaction fees paid to miners or validators for processing transactions on a blockchain network. They can vary depending on the network's congestion and are a significant consideration when using decentralized applications (dApps) or transferring tokens.
Yield Farming: Yield farming involves staking or lending crypto assets to generate returns in the form of additional cryptocurrency. It's a popular way to earn rewards in DeFi projects, though it often comes with higher risks.
Minting: Minting refers to the process of creating new tokens or NFTs (non-fungible tokens) on a blockchain. This is how new digital assets are introduced to the ecosystem, whether they are currency tokens or unique NFTs.
Airdrop: An airdrop is a distribution of free tokens to a community, usually as a promotional tool or reward for early participation. Airdrops are often used to increase awareness and engagement with a new project.
Whale: A "whale" is a term used to describe an individual or entity that holds a large amount of a particular cryptocurrency. Whales can significantly influence the market with their buying or selling actions.
ICO (Initial Coin Offering): An ICO is a fundraising mechanism where new projects sell their underlying crypto tokens in exchange for capital. It's similar to an IPO (Initial Public Offering) in traditional finance but occurs in the cryptocurrency space.
There are many projects that claim to be focused on building a community when, in reality, they just want to acquire customers. Never buy into a project without doing your due diligence, staying educated, and asking critical questions. If the project’s team can’t explain how they plan to grow the project financially in the long term for their investors and community, run. You win by educating yourself and building projects that allow your investors to win as well. A rising tide lifts all boats so to speak. I’ve seen more projects go cold and people lose their money than those where early investors walk away with thousands of dollars.
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